We review what the financial economics literature has to say about the unique ways in which the following three classic agency problems manifest themselves in family firms: (i) shareholders v. managers; (ii) controlling (family) shareholders v. non-controlling shareholders; and (iii) shareholders v. creditors. We also call attention to a fourth agency problem, unique to family firms: the conflict of interest between family shareholders and the family at large, which can be thought of as the “super-principal” in a multi-tier agency structure akin to those found in other concentrated ownership structures where the controlling owner is the state, a bank, a corporations, or other institutions. We then discuss the solutions or corporate governance mechanisms that have been devised to address these problems and what research has taught us about these mechanisms’ effectiveness at solving these four conflicts in family firms.

In fields as diverse as technology entrepreneurship and the arts, crowds of interested stakeholders are increasingly responsible for deciding which innovations to fund, a privilege that was previously reserved for a few experts, such as venture capitalists and grant-making bodies. Little is known about the degree to which the crowd differs from experts in judging which ideas to fund, and, indeed, whether the crowd is even rational in making funding decisions. Drawing on a panel of national experts and comprehensive data from the largest crowdfunding site, we examine funding decisions for proposed theater projects, a category where expert and crowd preferences might be expected to differ greatly. We instead find substantial agreement between the funding decisions of crowds and experts. Where crowds and experts disagree, it is far more likely to be a case where the crowd is willing to fund projects that experts may not. Examining the outcomes of these projects, we find no quantitative or qualitative differences between projects funded by the crowd alone, and those that were selected by both the crowd and experts. Our findings suggest that crowdfunding can play an important role in complementing expert decisions, particularly in sectors where the crowds are end users, by allowing projects the option to receive multiple evaluations and thereby lowering the incidence of "false negatives."

Raffi Amit, Y. Ding, B. Villalonga, H. Zhang (2015), The role of institutional development in the prevalence and performance of entrepreneur and family-controlled firms, Journal of Corporate Finance, (forthcoming).
Abstract

We investigate the role played by institutional development in the prevalence and performance of firms that are owned and/or managed by entrepreneurs or their families, while controlling for the potential effect of cultural norms. China provides a good research lab since it combines great heterogeneity in institutional development across its provinces with homogeneity in cultural norms, law, and regulation. Using hand-collected data from publicly listed Chinese firms, we find that, when institutional efficiency is high, entrepreneur- and family-controlled firms are more prevalent and exhibit superior performance than non-family firms. We find that the positive effects of family ownership and the negative effects of family control in excess of ownership that have been documented in earlier studies around the world are only significant in high-efficiency regions, and only for family-controlled firms proper, but not for entrepreneur-controlled firms. Institutional development also helps reconcile the divergence of results across prior studies regarding the performance impact of founders and their families as managers and not just owners. When institutional efficiency is high, the sign of the management effect is entirely contingent of whether the Chairman or CEO is the entrepreneur himself/herself (positive) or a family member (negative); when institutional efficiency is low, the effect is positive in both cases, and more strongly so in the case of a family member serving as CEO.

Raffi Amit, Y. Ding, B. Villalonga, H. Zhang (2015), The role of institutional development in the prevalence and performance of entrepreneur and family-controlled firms, Journal of Corporate Finance, (forthcoming).

Agency theory predicts that the right incentives will align agents’ interests with those of principals. However, the resource-based view suggests that to be effective, the incentive to deliver must be paired with the ability to deliver. Without requisite ability, an agent's incentives may yield the desired alignment but not the desired results. Using the corporate boards of Fortune 500 firms as an empirical context, this study shows that the presence of directors who lack top-level business experience but have large ownership stakes is negatively associated with firm value, an effect that becomes larger as the number of such directors on a board increases. Furthermore, firm value rises after such directors depart from corporate boards, with the greatest increases occurring in firms where the reduction in the number of these directors is the largest. While agency theory highlights the importance of having the right incentives in place, this research suggests that doing so can be ineffective if the right resources are not in place as well.